Getting a clearer picture on Netflix-Comcast deal

Share via e-mail

Netflix’s alliance with Comcast may set the stage for Comcast to include an application for Netflix’s service on its cable-TV boxes, making it even more accessible.

By Michael LiedtkeAssociated Press
February 25, 2014

SAN FRANCISCO — After years of bickering, Netflix and Comcast are working together to provide their subscribers with a more enjoyable experience as they watch movies and television shows over high-speed Internet connections.

The partnership is part of a breakthrough announced Sunday that requires Comcast’s Internet service to create new avenues for Netflix’s video to travel on its way to TVs and other devices. In return for the improved access, Netflix will pay Comcast an undisclosed amount of money for the next few years.

It’s an about-face for Netflix Inc., which had steadfastly refused to pay high-speed Internet service providers already collecting $40 to $60 per month from its customers. Netflix chief executive Reed Hastings had contended his company’s Internet video service is one of the main reasons households pay for broadband — making it unreasonable for Internet service providers such as Comcast Corp. to demand more money from content providers.

Comcast and other broadband providers argued Netflix’s growing popularity require the company to shoulder some of the financial burden for delivering its video. In evening hours, Netflix’s 33 million US subscribers generate nearly a third of the Internet’s downloading activity, according to the research firm Sandvine.

Now that Netflix has relented to Comcast, the largest US broadband service, similar deals are more likely with other Internet providers such as Verizon Communications Inc., AT&T Inc., and Charter Communications Inc. Here’s a closer look at what this shift means:

What will consumers see?

Netflix subscribers relying on Comcast should already be seeing fewer interruptions as video streams over the network. Picture quality should be better, too. Some analysts say the alliance might set the stage for Comcast to include an application for Netflix’s service on its cable TV boxes, making it even more accessible.

If the claims of better performance are true, it would reverse how Netflix’s video had been performing on Comcast’s Internet service.

The average speed during prime time fell 25 percent from January 2013 to this January, based on Netflix’s own measurements.

What was the problem?

Critics of Internet service providers suspect Comcast and its peers were deliberately slowing Netflix’s video to extract additional fees. But plenty of analysts traced the slowdown to Netflix’s increasing viewership.

Netflix has long been hiring third-party vendors such as Cogent Communications Group and Akamai Technologies Inc. to deliver video to Comcast and other Internet providers — as if Netflix had been hiring a fleet of delivery trucks to transport its products to a store. As more people streamed Netflix video, the company had to dispatch more trucks. Now that it’s getting paid extra money, Comcast is going to create special roads for Netflix’s video.

Is the Netflix deal unique?

No. Google Inc., which owns YouTube, and Facebook Inc., among others, had already reached similar deals with Comcast and other Internet providers. Netflix is falling in line with other services that generate a lot of traffic.

Why did Netflix ante up?

Comcast’s clout probably had a lot to do with it. Comcast has nearly 21 million broadband subscribers, and that number will swell to about 30 million by the end of the year if the company wins regulatory approval to buy Time Warner Cable Inc. for $45 billion.

If Netflix’s video streaming quality continued to deteriorate on Comcast, Netflix risked alienating its own subscribers.

Comcast may have been more willing to compromise to reduce the chances of Netflix amplifying its complaints about the deteriorating performance of its video service while government regulators scrutinize the Time Warner Cable deal.

What about Net neutrality?

This term refers to the idea Internet providers should treat all digital content equally, regardless of the originating website. The issue has become especially sensitive since last month, when a federal appeals court overturned Federal Communications Commission regulations enforcing Net neutrality. That decision raised fears that Internet providers would impose tolls to guarantee websites run at optimal speeds.

But Net neutrality governs the performance of bits and bytes once the digital packages are inside the gates of Internet providers. The Comcast-Netflix alliance is limited to how quickly content gets to those gates.

Will Netflix raise its rates?

The $8 monthly price for a Netflix subscription may eventually rise, but the increase probably will not be tied to the Comcast deal. It appears Netflix may just be reshuffling its expenses for video delivery.

The company already had been paying other contractors to handle those deliveries. Now, some of the money is going to be paid to Comcast, instead.

In a sign that Netflix isn’t anticipating dramatically higher expenses, the company did not revise its profit projections for the first three months of this year. Investors interpreted that as a sign that Netflix’s expenses aren’t going to rise above the levels that management already budgeted.

Meanwhile, Netflix is still experimenting with new prices for subscribers who want to be able to simultaneously stream video on more than the current limit of two devices. A plan allowing four simultaneous video streams is being tested at $12 per month.